The Golden Age of Global Investing

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Will the last few years be remembered as the golden age for global investing? In this new year's edition of PlanetQuant, we depart from our usual international rankings and analysis and try to answer this question. The above table shows what we all know - that anyone who made the decision to invest internationally in recent years years has been well rewarded. In a three-year period in which the US S&P 500 returned just under 27%, 21 of the other 27 international indexes have returns of 50% or better and 7 have returns exceeding 100%.

Interestingly, our "average country" row shows that an investor could have just purchased equal proportions of every international index ETF offered and captured returns of close to +90% for the three years, which is +23% annualized. And while many of the individual indexes are extremely volatile, much of this risk can be diversified away by owning multiple indexes. Q42007 is a perfect example - in a quarter in which some indices gained 10% and others lost 10% and historic 30-day volatilities exceeded 50 on many days, the "average" finished the quarter with only a 1.3% loss.

And this is exactly why we invest internationally, and why the golden age will continue. In every edition of PQ we find new winners and losers in the global markets, but what's often overlooked is the tendency of these investments to recover losses. Review the quarterly returns in the attached table, and try to find an ETF with back to back losses, i.e. two consecutive quarters with a significant loss in each quarter. They're difficult to find, aren't they? Only once in out of 308 possibilities have we seen a two-quarter loss greater than 10%. (Hint: It's in the middle of the table.)

Yes, the US market returned barely 5% in '07, and 20 of 28 of the ETFs that we analyze lost value last quarter, so of course we can expect lots of doom and gloom in the end-of-year summaries and 2008 forecasts. But the big picture is that while different individual countries and regions will continue to attract positive and negative attention periodically, investors are increasingly aware of and continuously evaluating the opportunities outside their own national borders, and this has created a "Goldilocks" level of market efficiency that is ideal for both passive and active investors.

So you won't find any pessimism here today. ' 07 was a great year for us both as international investors and as analysts, and will certainly be seen as the year in which the benefits of broad foreign diversification were impossible to ignore. We hope that our continued analysis helps you take advantage of those benefits and wish you the best for '08.

Comments

[robert1938]

Gotta love blind faith that things will stay the same because they have been like that for a while! Although you may be right - The global party will probably continue until inflation forces central banks to raise rates.

[alexdg]

Y07Q04 was down for most ETF's, so get ready for Y08Q01. Do you think the Dow in 2008 (atleast during the first half) will beat its historic max of 14200? Doesn't look like it will, and I seriously doubt any emerging market ETF will outperform the Dow in that regard. When the Dow tanks, these ETFs tank 2 fold. But I have to hand it to EWZ, it has been holding itself quite well (probably due to energy and mining stocks?), I guess China got oversold and Brazil was left behind regarding BRIC investments.

[alexdg]

Anyways, these figures represent the last 5 years of the current bull market, what kind of performance can you expect during a bear market (is it official yet for the Dow? it might be for financials and home construction, see ITB - topped in Aug/05)?